Baidu Should Buy Renren

Shares of Renren have been moving sharply higher on speculation that Baidu may snap up the social networking website operator's daily deals website.

Renren moved 8% higher yesterday and it's moving nicely today.

It's easy to see why Baidu would want Renren's Nuomi.com. It acquired a 59% stake this summer, so it's already placing a big bet on the flash-sale website. Baidu is also looking to take its travel portal Qunar public, freeing the already cash-rich company into exploring new growth opportunities.

The sticking point there is that Nuomi would need to improve for the rumored transaction to take place, but why stop there? Baidu should just go ahead and buy all of Renren.

It's true that Renren is presently profitless. Growth has slowed, especially for its flagship social networking website, but that also represents an opportunity for Baidu.

Roughly half of Renren's market value consists of cash, making an outright purchase cheaper than the market cap suggests. It's also more than likely that Baidu's strengths could be used to turn the unprofitable Renren into an accretive contributor. Baidu's thick Rolodex of advertisers and the credibility it would lend to Renren would go a long way toward increasing traffic and monetizing it more effectively.

It wouldn't be hard to convince Renren shareholders to punch out. Analysts don't see Renren turning a profit until 2015 at the earliest, and that can become even more challenging if it can't turn its bleak online advertising prospects around.

Some will argue that Baidu has better things that it can do with its billions of greenbacks. Instead of buying Renren's Nuomi or all of Renren, it can just buy Vipshop .

Vipshop is a profitable and fast-growing Nuomi rival. Analysts see Vipshop more than doubling its revenue this year, following that up with a still impressive 58% spurt come 2014. But Vipshop has been one of China's hottest stocks after nearly quadrupling this year. Investors won't want to bow out without a ridiculous premium. Vipshop's market cap is substantially larger, and that's before we back out Renren's ample cash.

Renren is a cheap diamond in the rough that Baidu could spruce up to the point where it truly moves the needle. Baidu can always take the easy way out and just buy the balance of Nuomi, as has been reported, but the real prize would be in swallowing the parent company whole while it's still out of favor.

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